Peter Neubeck
Daniel Parera
Covid threw the spotlight on a handful of younger biotech companies which emerged as heroes of the crisis. Peter Neubeck and Daniel Parera of Kurma Partners, part of the Eurazeo Group, explain how this “lighthouse effect” can help steer future European biotech entrepreneurs to success, and show why VC investors are key in helping them build their businesses to play a role alongside Big Pharma on the global stage.
European biotech comes of age
One of the few positive things to emerge from the tragedy of the Covid pandemic was the heightened awareness of the importance of biotechnology and its role in creating life-saving vaccines and drugs.
Overnight, biotech companies like BioNTech and Moderna became household names, the talk of everyone from taxi-drivers to chat-show hosts.
Such a leap in positive public perceptions isn’t just anecdotal. It matters in the long-term because it potentially encourages politicians and institutional investors to start investing, or to increase funding, in the sector. On a local and regional level, it spurs governments to design infrastructure programs to attract biotech start-ups like BioNTech (Germany’s Rhineland-Palatinate being a case in point). And as institutional investors are increasingly focused on socially responsible investing, biotech and life sciences become the obvious ideal candidate, delivering tangible impact for mankind.
This increased awareness and new “hot” status for biotech is especially significant for Europe, where institutional investors and pension funds have tended to be less keen than their US counterparts to commit resources to early-stage venture capital funds investing in the complex scientific research at the origin of any life-saving new drugs.
The significance of the BioNTech and Moderna cases goes well beyond just raising an awareness of biotech in terms of generating value, profits and significant impact. It has also boosted understanding of how the biotech, venture capital and pharmaceutical industries work together, and why their cooperation is so important to achieve the spectacular results we saw in the Covid vaccines.
Venture capital helps structure the value chain
This recent history has provided a strong basis for a better understanding on how venture-capital funds help deliver more such success stories. The opportunity here for early-stage investors lies in the fragmented nature of the life sciences industry. The value chain in question is long and complex. It starts with the university-based scientists carrying out research on the underlying biology and disease pathology and on potential new targets. Then start-up companies are created, funded and coached by VCs. These start-up biotechs work with a chain of service providers, such as clinical research organizations (who carry out lab experiments, pre-clinical studies and/or clinical trials, necessary to put the science to the test) and contract development and manufacturing organisations who produce the drugs. When this combined team has taken the project to a value inflection point, typically Big Pharma will then step in to take the project through the later-stage clinical phases and registration into the market.
This fragmentation of the value chain – which can typically stretch across 12 or more years from scientific laboratory to the patient’s bedside – is a trend that has been underway for many years now. It has been driven by the multiplication of technologies used for a therapeutic drug and it has involved a shift towards increasing specialisation throughout the process, delivering tangible benefits thanks to a sharper focus on each step, resulting in more quality, speed and efficiency. The complexity of dealing with so many specialist participants across the value chain has rendered the role of the venture capital investor central. In addition to their expertise in financing and IPO and M&A exits, those VC investors that have operational experience in R&D, registration and commercialisation then become an important value-add and key factor of success. Indeed, it is the evident value of the VC’s role that helps explain, why a number of private equity companies have recently engaged in their own dedicated early-stage biotech funds.
Headwinds still provide a challenge to the sector
Even though public and investor awareness of biotech’s importance has risen sharply since the pandemic, the industry is nevertheless facing several challenges, which are related both to operational execution and the ability to exit or finance continued development. Clinical trials in hospitals around the world have been severely interrupted as medical staff struggle to cope with the number of Covid victims, and care of other patients has been deprioritized where possible. Disruptions to the global supply chain have caused delays in development plans, especially for biotech, while also raising major questions about dependency on foreign markets and the need to bring production closer to end-markets for pharmaceutical companies.
On the other hand, the pharmaceutical industry is returning to more cautious selectivity in looking for the next breakthrough from start-ups. In addition, volatile stock markets have knocked down valuations for those companies that have already gone public. However, against this backdrop, the scientific community in Europe remains focused on doing good science, and remarkable stories like BioNTech provide a priceless “lighthouse effect” in inspiring scientists to seek funding that will allow them to translate their discoveries to marketable vaccines and drugs.
As a result, there are widening opportunities in biotech for early-stage investors. However, in scouting for prospective investments, one needs to be careful to ensure that the biotech entrepreneurs and start-ups under consideration match certain key success factors. These include a rigorous focus on research addressing unmet medical needs, such as rare or genetic conditions, neurodegenerative diseases, or new cancer therapies. The start-ups also need to demonstrate that they deliver significant innovation, as opposed to merely incremental improvements in existing treatments. They need to be agile, with quick decision-making and lean operating models. And above all, they need to be able to deliver a “proof of concept” with a sound data package which meets Big Pharma standards and will enable these larger companies to pick up the torch for them.
VC funds that can draw on their experience with other start-ups and their networks across biotechs, clinical experts, and the pharma industry will prove to be important allies to young biotech companies corresponding to those success factors.
And for the institutional investors backing an early-and late-stage biotech funds, they can measure the value created not just in terms of financial return, but also in real human impact as they help defeat disease and save lives.
